Nigel Mills MP: Does the right hon. Gentleman not accept that one reason why we have got this far is that Graham Aaronson, who probably meets the right hon. Gentleman’s definition of someone

who has made his living from selling tax-avoidance schemes or at least advising on them, recommended that the Government go ahead with the GAAR?

Michael Meacher MP (Oldham West and Royton, Labour): I did not catch what the hon. Gentleman said. Can he say it a little more loudly and clearly, or can we have a conversation afterwards?

Nigel Mills MP: I will say it more loudly. Does the right hon. Gentleman accept that one reason why we have got this far is that Graham Aaronson, who arguably meets his criterion as someone who has made a living out of at least advising on such schemes, recommended that the Government go ahead with the GAAR?

Michael Meacher MP (Oldham West and Royton, Labour): Yes, I appreciate that. It seems that Graham Aaronson, whom I have criticised pretty strongly in the House in the past, has for reasons best known to himself—although I am very appreciative that he has done this—changed his mind in the important respect that the hon. Gentleman described and which I tried to set out at the beginning. There is more joy in heaven over one sinner who repents than over 100 just men.

Nigel Mills MP: It is a pleasure to speak in this debate, and I rise to speak to amendments 11 and 12, which stand in my name.

I have said this before, but I have concerns about Parliament agreeing overwhelmingly with a principle that effectively says, “We as a Parliament, even with all the specialist advice we get, cannot draft the law sufficiently well to leave our taxpayers to try to apply and follow it, and leave HMRC and the courts to determine whether that is the case.” The proposals of the Government and of the right hon. Member for Oldham West and Royton

(Mr Meacher) would in effect create a power for HMRC to say, “While the law actually says that, what we really meant was something a little bit different, so while the taxpayer has complied with the letter of the law, they have not complied with the letter of the law as we wish it had been written.”

That is a real power for Parliament to give away. We are saying to an executive agency of the state, “Your job is no longer to apply the law; your job is to rewrite it as you wish it had been written by Parliament in the first place.” I think we should be very careful before going taking such a line. We need to know exactly what we are doing and we need to be happy with setting that principle. If the Government tried to apply such a principle to criminal justice law, we could end up arresting people for something that was not a legal offence but we wished had been a criminal offence. If we applied it to immigration law, for example, there would be howls of outrage saying that the state had gone mad with excessive power, and that it was the end of the rule of law and not the way for a sensible Government to behave.

Mark Field MP (Cities of London and Westminster, Conservative): I entirely agree. That sense of arbitrariness will potentially do great damage to the UK as a place that has always been welcoming to business internationally, benefiting our economy as a whole. He is absolutely righ

I am grateful to my hon. Friend and I would like to expand a little on this theme. It has been said before that there are various ways of interpreting what the rule of law means. One version from the 17th century is that the rule of law is the

“supremacy of regular power as opposed to arbitrary power”.

In the case before us, rather than saying “Here is the law that applies to everyone,” we are giving the Revenue the right to rewrite the law only for certain people subject to certain permissions. That sounds like arbitrary power to me.

As a classics graduate, I thought I would dip back into history and finally find some use in having done a classics degree. Plato said:

“Where the law is subject to some other authority and has none of its own, the collapse of the state in my view is not far off; but if the law is the master of the government and the government is its slave, then the situation is full of promise.”

What we are doing here is saying that the law now has no authority, as we are giving somebody else the power to change the law, and that rather than the Government having to follow the law, the Government and its agencies can change the law retrospectively. We need to be clear that we are weighing up whether the real sin of the existing excessive, outrageous and truly abominable level of complex tax avoidance by people who should know better and should not be doing it is enough for us to risk weakening the rule of law.

t to draw a direct comparison between issues relating to the Finance Bill—after all, we have one every year, so we can try to tighten up any problems—and issues relating to the criminal justice system. As he says, if the same principle were applied to criminal justice, it would rightly lead to outrage.

Nigel Mills MP: I am grateful to my hon. Friend and I would like to expand a little on this theme. It has been said before that there are various ways of interpreting what the rule of law means. One version from the 17th century is that the rule of law is the

“supremacy of regular power as opposed to arbitrary power”.

In the case before us, rather than saying “Here is the law that applies to everyone,” we are giving the Revenue the right to rewrite the law only for certain people subject to certain permissions. That sounds like arbitrary power to me.

As a classics graduate, I thought I would dip back into history and finally find some use in having done a classics degree. Plato said:

“Where the law is subject to some other authority and has none of its own, the collapse of the state in my view is not far off; but if the law is the master of the government and the government is its slave, then the situation is full of promise.”

What we are doing here is saying that the law now has no authority, as we are giving somebody else the power to change the law, and that rather than the Government having to follow the law, the Government and its agencies can change the law retrospectively. We need to be clear that we are weighing up whether the real sin of the existing excessive, outrageous and truly abominable level of complex tax avoidance by people who should know better and should not be doing it is enough for us to risk weakening the rule of law.

Jacob Rees-Mogg MP (North East Somerset, Conservative): I entirely agree with my hon. Friend on the issue of the rule of law. However, I wonder whether the outrageous examples that have caused such scandal over tax avoidance

were actually examples of tax evasion, and whether HMRC has in fact been very weak about enforcing the tax law as it exists now.

Nigel Mills MP: I agree with my hon. Friend that tax evasion is a crime that should be prosecuted to the fullest possible extent, but in this instance we are talking about tax avoidance.

We should be clear about the principle of what we are doing. We are saying to HMRC, “You can enforce something that is not in law.” If we are to pursue that line, we must be certain that safeguards are in place so that we do not see—metaphorically, of course—tax inspectors turning up with baseball bats, banging down the door of the taxpayer and saying “Give us money or else.” The “or else” would mean, of course, HMRC making the assessment and taking the money in any event, and the other party having to go through expensive court proceedings to try to get it back. I have worked with many tax inspectors, and clearly I do not think that any of them would literally pick up a baseball bat, but there is a risk that in any difficult situation in which there is some doubt about the application of the law, tax inspectors will start writing letters saying, “Unless you agree with my analysis, I reserve the right to apply the general anti-abuse rule, in which case”—effectively—“you will be in deep trouble.”

I think it would be very generous of Members to assume that, in all circumstances and for ever, HMRC would apply this power only to the largest, most abusive and most complicated taxpayers. I suspect that, in the experience of most Members, the Revenue has at times been a little weaker when tackling the very large taxpayers with very big pockets, and a little stronger when tackling those who are a bit smaller and a bit less sophisticated, and who may not be able to fight back as effectively. There is a real risk here. If we give the Revenue a power amounting to complete discretion in regard to whether it applies this rule to individual taxpayers, what is to prevent a large organisation from buying its tax inspector a nice lunch, and an application to apply the rule perhaps never actually being made?

I am not suggesting that that would ever happen. I have certainly never known such things to happen; tax inspectors are usually very law-abiding, and very committed to their role. However, there have been instances in which we as a Parliament have been concerned that the Revenue has not treated the largest and the smallest taxpayers equally. In this instance, we are giving the Revenue a discretionary power, and allowing it to choose when to try to use it. Are we sure that the Revenue will use that power against the people against whom we think it should be used, and not against our constituents who have not done anything particularly wrong?

It has been suggested that we are introducing too many safeguards, and questions have just been asked as to why we are imposing the burden of proof on the Revenue rather than on the taxpayer, as in every other situation. This is plainly not a normal piece of tax law. We are saying, “You may have complied with the law but we still think that you are in the wrong, so we will retrospectively pretend that the law said something different from what it actually said.” In such circumstances it must be right for the Revenue to have a duty to demonstrate that that is appropriate, rather than saying to the taxpayer, “You must prove somehow that you

acted within a law that had not actually been published.” That would be nonsensical. It would be equally nonsensical to make the penalties for contravening the GAAR higher than the penalties for contravening the published law. If I flout the law and am defeated in my claim on the basis on the published law, I will rightly be subject to penalties, but for me to be subject to higher penalties when I have not actually broken the published law, which I can read, would certainly be nonsense.

I accept that the Government have undertaken long and detailed consultation and have tried to find a way of introducing a power to tackle the most aggressive, egregious and outrageous tax avoidance without creating some of the pitfalls that would worry me and, I think, my hon. Friend Mark Field. We do not want to create a tax system that is based not on law, but on random interpretations of various transactions by HMRC at some point in the future. I also accept that the Government have made the safeguards as reasonable as is commensurate with ensuring that the law retains some teeth.

I shall ask some questions about the drafting of the Bill later, but let me first explain why I tabled my amendments. I wanted to try to ensure that the power focused on the large, complex, aggressive, expensive schemes peddled by naughty solicitors and accountants, rather than being used as a general threat against ordinary taxpayers who had tried to structure their affairs sensibly and had chosen to conduct a transaction in a way that we could accept.

There are many innocent ways of trying to reduce a tax bill. It is possible to make a pension contribution rather than taking income as taxed earnings. I do not think any of us would object to that. The law clearly identifies it as a choice that we can all make. The owner of a company can choose whether to take a dividend, a salary or a bonus, or whether to leave the cash in the company and to be taxed on a capital gain when he leaves. I do not think many of us would say that someone who chose not to take a bonus in the year in which he sold his company but instead to allow the cash to be deemed a capital gain in order to secure a lower tax rate would be perpetrating an outrageously aggressive tax abuse arrangement of the kind that we should prevent by rewriting the law. We must be careful not to allow the Revenue to apply this power to every piece of innocent, sensible tax planning, when the only fallback will be the definition of a reasonable use of the rules.

Some people might consider it reasonable for Parliament to intend what it says it intends. When we pass a law, it is reasonable to assume that we mean what we put in that law. If we meant something different, we probably ought to have said that something different, and if it turns out that we have got it slightly wrong, we should amend the law. I accept that we have been doing that in various situations for the last God knows how many years, and have ended up with a hugely complex tax code. Every time we build in more complexity, we create more loopholes, and then we have to create even more complex rules to try to close those loopholes—and then we create more and more. Perhaps the answer is to have much shorter, simpler tax codes. I hope that, once the Government have put the GAAR on to the statute book—as I fully expect them to do—we can attempt a wholesale simplification of our tax regimes.

Mark Field MP (Cities of London and Westminster, Conservative): My hon. Friend has identified the nub of the problem. The complications and the sheer size of the tax code have become the godfather of much of the tax avoidance with which many Members in all parts of the House want us to deal.

Nigel Mills MP: Am I right in thinking that the second sign of madness is to keep doing the same thing and expecting a different result? I think that that applies to introducing more and more complexity and assuming that the outcome will eventually be different.

Sheila Gilmore MP (Edinburgh East, Labour): Surely the problem with this line of argument is that it does not establish what is cause and what is effect. The

The hon. Lady is right. I have not sought to defend those who peddle tax avoidance schemes. It is probably human nature for us all to try to minimise our liabilities. I personally think that we should try to adjust our tax regimes so that they get much closer to taxing the real profit that is declared, rather than allowing a collection of reliefs, allowances, incentives and so forth to provide scope for manipulation of the various circumstances in which people find themselves. However, I accept that people would still try to get round the simplest tax code in the world, and that we would need provisions to stop them.

My amendments are designed to ensure that, if the Revenue uses this power, it uses it to deal with the largest, most outrageous schemes. We do not want it to go around threatening all the small taxpayers who are simply trying to go about their way of life. I was not convinced that the wording of the Bill, and certainly not the wording proposed by the right hon. Member for Oldham West and Royton, would meet those concerns. I tried to provide a de minimis: the tax at stake would have to be above a certain amount before the rules could be applied. That would provide certainty, ensuring that the vast majority of taxpayers would not be subject to some retrospective, random rewriting of the law.

assumption seems to be that the fault lies with the fact that tax is too complicated and that there is too much of it, which somehow encourages people to avoid it. Perhaps a complicated tax system, and many of the regulations that exist, have been made necessary by the very fact that people try to avoid tax.

Nigel Mills MP: The hon. Lady is right. I have not sought to defend those who peddle tax avoidance schemes. It is probably human nature for us all to try to minimise our liabilities. I personally think that we should try to adjust our tax regimes so that they get much closer to taxing the real profit that is declared, rather than allowing a collection of reliefs, allowances, incentives and so forth to provide scope for manipulation of the various circumstances in which people find themselves. However, I accept that people would still try to get round the simplest tax code in the world, and that we would need provisions to stop them.

My amendments are designed to ensure that, if the Revenue uses this power, it uses it to deal with the largest, most outrageous schemes. We do not want it to go around threatening all the small taxpayers who are simply trying to go about their way of life. I was not convinced that the wording of the Bill, and certainly not the wording proposed by the right hon. Member for Oldham West and Royton, would meet those concerns. I tried to provide a de minimis: the tax at stake would have to be above a certain amount before the rules could be applied. That would provide certainty, ensuring that the vast majority of taxpayers would not be subject to some retrospective, random rewriting of the law.

Stephen Phillips MP (Sleaford and North Hykeham, Conservative):

My hon. Friend is making a powerful speech, and is advancing a compelling argument for his de minimis principle. The problem is, in my view, that it is a compelling argument for the exclusion of part 5 of the Bill, and that the de minimis principle that he seeks to introduce ignores the other principles that he has advocated. Does he agree with that?

Nigel Mills MP: Yes, I do. Various Members have expressed concern about the principle before. I think we must accept that the House has concluded that the only way of tackling the problem of excessive outrageous tax avoidance is to risk the principle of the reading of the rule of law, and to be satisfied that a relatively minor version is what is needed to tackle tax avoidance. I am not sure I would have come to the same conclusion. The previous Government looked at a general anti-avoidance rule about a decade ago, and having consulted for quite a while and made various drafts, they decided not toproceed, probably because of the same concerns that my hon. and learned Friend has set out. You perhaps remember those days and that consultation, Ms Primarolo.

Given that this is going to happen, I am trying to find a way to ensure that the provision cannot be abused and used against our small and medium-sized taxpayers. There are precedents in the tax system for certain rules applying only to certain sizes of taxpayer. The transfer pricing rules apply only to large corporates, unless the Revenue gives separate direction. I am not sure it has ever given a direction to apply transfer pricing rules to small or even medium-sized companies; perhaps the Minister has the data somewhere and can find some inspiration as to how many times that has happened in the 10 years or so since those rules have been in place. It is not unusual for us to say that actually, some rules are so complex and burdensome that we will focus them on the largest and most sophisticated taxpayers, and not apply them to small ones.

Ironically, transfer pricing rules are the exact rules we have in place to tackle the abuse by Starbucks, Google or whichever companies the right hon. Member for Oldham West and Royton mentioned. We have the power to restate the pricing of transactions exactly to stop that kind of abuse. However, I am not convinced that a general anti-avoidance rule can prevent people from choosing to put too much profit in one territory, rather than another. I am not sure that there is some kind of artificial arrangement or step that would work. I can see that there could be some complicated corporate legal structure to avoid taxation of a transaction that ought to be taxed, and which the right hon. Gentleman’s new clause might get to. However, I am not sure we can do that by saying, “We think more profit should have been reported in the UK than actually was.” I suspect there would be nothing artificial to trigger the arrangement in that situation, so I am not sure that even his drafting of the rule would catch much of the outrageous avoidance he seeks to catch. We have to use the transfer pricing provision and various other measures to get there.

The principle I have tried to set out in my amendments is that the Revenue can apply the provision only if the tax at stake is a certain amount. I am consciously trying to avoid taxpayers then having a series of schemes that slip under the de minimis. I tried to include a provision establishing that we should test this by aggregating all the schemes in place in a tax year, or when looking at the whole benefit over the life of the scheme, in order to prevent that kind of situation from happening. I am not sure whether the Minister will be inclined to accept this principle. I ask him when he responds to set out exactly what schemes the Government are after, and when they think the Revenue should use this provision. Is it to be used only against the most aggressive and complex schemes that have been designed purely to exploit loopholes, and not intended to be used for routine, grey-area inquiries where there is some uncertainty, or where there has been some choice in how to take various proceeds out of a transaction? A lot of people are concerned that this power will be stretched and used beyond the intention of the Government, for things we could not possibly intend to use it for. Given the Bill’s drafting, it is very hard to be confident that the Revenue

would not seek to do that in any situation. The Bill can be read in two ways: as not applying to very much at all, or applying to nearly everything.

I have a couple of questions for the Minister on the Bill’s drafting. A lot of anti-avoidance rules refer to the question whether a person enters into an arrangement to secure a tax advantage for themselves or for a connected person, be it another member of the group of companies, or a relative. The “or another related person” principle is not written into the Bill. I am not sure whether that is an oversight, or whether that is the case because the Government think it unnecessary. Perhaps the Minister can answer that question.

I am also a little intrigued by the references in clause 209 to priority rules, which include a tax treaty. My understanding of the law is that an international tax treaty trumps all domestic legislation, and that it is not possible for us to legislate to overrule a tax treaty. However, that appears to be what we are trying to do here. Perhaps the Minister could explain how he thinks that will work. This would appear to be a weakness of the system.

Overall, I am resigned to the fact that at some stage after passing the Bill, we are going to abandon the principle of applying the rule of law as written, and accept the fact that an agency of the state can rewrite it to suit itself, and the taxpayer has to fight their way through the courts. I am trying to ensure that this provision is used only for the things that we really intend to use it for, and that it does not become a broad, baseball-bat approach to tax compliance, which we would all hate to see. I hope the Minister can deal with some of those concerns.

Nigel Mills MP: Does my right hon. Friend agree that it is preferable that only people who engage in aggressive tax abuse should be put on notice, and that people innocently going about trying to structure their affairs normally within the law should not be scared of the provision at all?

Andrew Stunell MP (Hazel Grove, Liberal Democrat): I was very attracted to one point that my hon. Friend made in his speech, which was that he thought there was a tendency not to go for the biggest fish with the sharpest teeth and the most expensive lawyers, but to go for the little people or at least the middle-sized people. That is a powerful point and I hope those on the Front Bench are listening carefully. A general anti-avoidance rule needs to be general—that is to say, applicable to even the biggest fish with the sharpest teeth and the most expensive lawyers.

In amendment 6 and several others, some of which were debated earlier today and some more of which will be debated tomorrow, the Labour Front-Bench team has given us a very pretty set of trinkets. They all start with the phraseology

“The Chancellor shall review the possibility of” doing this, that and the other. They have all obviously been produced by Labour’s amnesia factory, which has forgotten entirely that, on general election day in 2010, the country, the public purse, borrowed £428 million. The day before it borrowed £428 million, and the day after it borrowed £428 million. I commend Government Front Benchers again for reducing that figure by a quarter—a substantial amount. It is surprising that the range of amendments and the speeches made by Labour Members in the Budget debate, including today, have all said that the right solution to the problem is to borrow more. That is not the right solution, and, as I say, the amnesia factory is churning them out.